If you're looking for a way to reduce your tax liability, there are plenty of loopholes that can help. At Green Valley Tax We can make sure the loop wholes are properly used. Most people don't know about some of these loopholes because the IRS doesn't advertise them, but you can take advantage of them in order to save money. Be careful though: just because it's a loophole doesn't mean you won't get penalized for using it incorrectly. Here are eight loopholes you should keep an eye on.
1 - Purchase Municipal Bonds
Income from investing in municipal bonds tends to be exempt from Federal and state taxes, depending on where you live and if the bond you are purchasing is from your state. This does not include capital gains, only the interest income.
Even though these tend to have lower rates compared to their corporate brothers and sisters, those tax filers in higher income brackets can expect a tax-equivalent yield in parallel to your earnings.
2 - Hang on to Long Term Capital Gains
This limit seems to trend upwards as far as taxable income. For 2021, it was set to $80,800 for a married couple filing jointly and $40,400 for individual filers. That means a 0% payout on long-term capital gains. In other words, if you can invest in municipal funds, stocks, bonds, or real estate and hang onto them for a while, you should.
3 - Max Out Contributions
Any chance you can max out retirement contributions, you should. The 2022 contributions are now up to $20,500 for a 401(k) or 403(b) plan. While the catch-up amount hasn’t changed, it is still worth pursuing if you are over 50. You can also contribute up to $6,000 to qualified IRAs ($7,000 for those over 50). Of course, that will depend on your overall income level, but if you can contribute, do it!
4 - Itemize if You Can
The limit on itemized deductions is set to regain a cap on January 1, 2026. That means you can itemize as many deductions as you would like to experience a lower tax obligation than you would with the standard deduction, regardless of filing status. To take advantage of this, you need to keep substantial records of every single expense and deduction possible, including medical.
5 - Give to Charity
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 effectively extended the CARES Act. It means you can deduct up to 100% of your adjusted gross income (AGI). That is your total income minus whatever deductions you may have taken. If you are already maximizing contributions and using itemized deductions, you could contribute as much as you like to lower your tax obligation and possibly your bracket.
6 - Start a Business - Right Now!
Self-employed individuals can take advantage of various deductions on their tax returns from traveling to the ever-popular home office deduction. This is not for those working remotely from their home office, only for those that create a business with the purpose of earning a profit. It takes very little to set up an LLC or S corp in today’s digital world. You could easily change your regular job into a “consulting” business and experience a range of beneficial deductions.
7 - Don’t Forget the Kiddos
This one is not quite activated yet, but we anticipate congress or state-level representatives to fight for some form of Child Tax Credit renewal in 2022. Families experienced significant savings by having this credit boosted to $3,600 for those qualified dependents aged 5-17 and even more for babies. This is one of those acts that was so popular, that we cannot imagine it not coming back.
8 - Medical Deductions
Self-employed individuals can deduct the total cost of health insurance premiums for themselves and their families. That includes children up to 26 years of age. You can also create a corporation and wrap in employees to this deduction. This is another argument for itemized deductions. You can deduct any medical expenses above 7.5% of your AGI, but you have to itemize to take advantage of this situation.
Bonus Tip: Education Credits
For those workers going back to school or helping their families make it through college, the American Opportunity Tax Credit (AOTC) is still in effect. That allows you to claim up to $2,500 per student unless the credit brings your liability to zero. In that case, you can get 40% for up to $1,000 per student.
There is also the Lifetime Learning Credit (LLC) that covers up to $2,000 in educational expenses for those parents working on everything from technical classes for job skills to degree programs.
Where to Find More Loopholes
The best way to improve your tax situation for the upcoming 2022 season is to reach out to the expert team at Green Valley Tax Services. We have the knowledge and experience to uncover those deductions, credits, and loopholes sure to lower your obligation at the end of the year. Our professional advisors will work with your unique situation and create a better foundation to prepare you for the upcoming annual or quarterly tax filings. Reach out today and schedule a consultation to experience the growth potential and savings opportunities from our expert team.